6 Key Considerations When Choosing a Travel Loan
Most banks and Non-Banking Finance Companies (NBFCs) allow the proceeds of regular personal loans to be used for financing travel or vacation expenses. Some lenders also provide travel loans as a variant of personal loans specifically for the purpose of financing travel/holiday related expenses. Just like personal loans, applicants should evaluate several key factors to make an informed decision. Stated below are the six important factors to consider while availing travel loans:
Credit Score
Just like regular personal loan, lenders evaluate travel loan applicants based on their credit scores to determine their loan eligibility. Applicants with credit scores of 750 or above usually have a better chance of getting their travel loan application approved. As most lenders also use credit scores to set interest rates, applicants with higher scores may also benefit from lower interest rates.
To improve their loan eligibility, prospective borrowers should practice good credit practices, such as paying credit card bills and EMIs on time, avoiding multiple loan or credit card applications in a short span and checking your credit reports at periodic intervals. Doing so will allow applicants to correct any errors or inaccuracies and to identify any fraudulent activity. Reporting these issues to both the lender and the credit bureau can improve credit scores and, in turn, enhance their loan eligibility.
Interest rates
Interest rates for travel loans are usually the same as those for personal loans, starting around 10.49% p.a. However, the final rates offered to an individual can vary between lenders due to differences in their credit assessment models. Therefore, it's important for applicants to compare personal loan interest rates from various banks and NBFCs before applying for a travel loan.
Many lenders also offer pre-approved personal loans to their existing customers based on their credit profiles, often at lower interest rates. Prospective travel loan borrowers should first check with their current banks or NBFCs, where they may have deposits, loans or credit cards, to see if they qualify for any pre-approved loan offers. Following this, they should use online financial marketplaces to compare interest rates from other lenders based on their credit profile. Then, they should go for the bank/NBFC offering the lowest interest rates and providing the quickest disbursal facility.
EMI affordability
Lenders usually approve travel loans for individuals whose total debt obligations, including the EMI for the proposed loan, do not exceed 50-55% of their net monthly income. Applicants with debt obligations above this threshold may either face loan rejection or receive approval of their loan application at higher interest rates. To improve travel loan eligibility, such applicants can consider opting for longer repayment tenures or reducing the loan amount to reduce their total EMI obligations.
Repayment tenures
Travel loans, like personal loans, usually have repayment tenures of up to 5 years. Although some banks and NBFCs may offer longer tenures of 6 or 7 years. Choosing a shorter tenure will result in lower total interest costs but higher EMIs whereas a longer tenure will result in higher overall interest but lower EMIs. Thus, applicants should use personal loan EMI calculators to determine their optimum loan tenure and EMI after factoring in their interest cost, repayment capacity and unavoidable financial goals. These calculators are available on banks and NBFC websites offering personal loan or travel loan options or on online financial marketplaces like Paisabazaar.
Prepayment charges
The RBI has prohibited lenders from charging part-prepayment or foreclosure penalties on loans with floating interest rates. However, lenders can impose such penalties on loans having fixed-interest rates. For travel loans with fixed interest rates, prepayment fees can be as high as 5% of the outstanding principal amount. Additionally, banks and NBFCs may require borrowers to repay a preset number of EMIs before becoming eligible for making prepayments or loan foreclosures. Therefore, it’s crucial for those considering part-prepayment or foreclosure to compare multiple lender’s prepayment and foreclosure conditions before choosing a loan.
Processing fees
The processing fees for travel loans can go up to 4% of the loan amount. Some banks/NBFCs also cap their processing fees, irrespective of the personal loan amount while some others waive the processing charges during festive seasons. As the personal loan processing fees add to the total borrowing costs despite being a one-time expense, prospective personal loan applicants should compare the processing charges levied by multiple lenders while comparing their travel/personal loan offers.